XM, Sirius Face Formidable Tech, Regulatory Hurdles

Yes, this "merger of equals," which values the combined company at $13 billion, including $1.6 billion in debt, is aimed at cutting costs and getting the collective bottom line into the black as soon as possible. That should sound like music to the ears of investors who've put up with years of mounting losses. However, between the two regulatory agencies — the Department of Justice and the Federal Communications Commission — that have to OK this deal and the technological and financial hurdles the companies will face if the deal does get approved, this pairing may not be the match made in heaven that long-term investors have been hoping for.

Even Wall Street, which has applauded the possibility of an XM-Sirius merger in the past, seems skeptical. According to the terms of the deal, which was announced on Monday, XM shareholders will receive 4.6 shares of Sirius stock for each share they own. Given Friday's closing prices, that would put roughly a 21.7% premium on XM's shares at a price of $17.02 a share. However, the stock has only climbed about 11%, indicating that investors are hesitant to fully price in the deal. Sirius's shares are up close to 7%.

Right now, the regulatory hurdles that XM and Sirius face are investors' primary concern. Federal regulations currently prohibit one company from owning both satellite radio licenses. FCC Chairman Kevin Martin said in a statement Monday that the hurdle for these two companies to gain approval is "high" and that they would have to prove that a pairing would ultimately benefit subscribers — both in choice and price.

The National Association of Broadcasters, a trade association that lobbies on behalf of radio and television networks, made it clear that the satellite radio operators were going to face a formidable fight. "In coming weeks, policy makers will have to weigh whether an industry that makes Howard Stern its poster child should be rewarded with a monopoly platform for offensive programming. We're hopeful that this anticonsumer proposal will be rejected," the group said in a statement.

XM and Sirius will argue that regulators should change the rules because the digital music market is now flooded with options for consumers such as high-definition radio, MP3 players and mobile phones that play music like Verizon's (VZ) V Cast. And, of course, there's always good ol' terrestrial radio. They will also argue that by giving subscribers the choice of hearing both Howard Stern (a Sirius show host) and Opie and Anthony (on XM), they are providing them with a broader listening experience.

April Horace, an analyst at Janco Partners, says the likelihood of the merger gaining approval "seems to be anybody's guess." However, she adds that gaining that approval could come with some costly stipulations such as requiring the satellite radio operators to give up part of their spectrum.